The better than expected GAAP earnings led to a Tier 1 ratio of 10.5% - well ahead of the 9.6% we were expecting and highest of the Canadian banks that have reported.

Loan losses of $219 million were ahead of our $203 million estimate. The increase from Q4/07 was driven by higher losses in cards (volume growth, higher loss rates and the expiry of a securitization), as well as lower recoveries and higher losses in the corporate lending portfolio.

Accounting rule changes helped CIBC, as expected.

• $6.4 billion in CLO and trust preferred securities were reclassified from trading to held-to-maturity, which avoided losses of $629 million.

• Management also took advantage of new fair value rules to value CLO holdings based partly on models rather than solely on broker quotes, which increased the fair value of those instruments by $310 million, even though the market value of the assets would have declined during the quarter.

• These changes in value are justifiable based on accounting standards but they mask a decline in the market value of assets during the quarter.

We continue to rate the stock as Sector Perform, which is the highest rating we have for a Canadian bank. For the next three to six months, CIBC's stock should benefit from (1) low exposure to U.S. credit, (2) lower exposure to corporate credit risk, and (3) a higher Tier 1 ratio than peers. Offsetting these positives is continued lackluster relative retail revenue growth (down 2% YoY) and, looking further out, we believe that a significant increase in unemployment (which is not happening right now in Canada) would be most negative for CIBC relative to Canadian banks.

• We have raised our 12-month price target by $2 to $53 per share to reflect the higher than anticipated book value.

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Scotia Capital, 5 December 2008

• CM reported a decline in cash operating earnings of 32% to $1.57 per share, in line. The decline in earnings was led by CIBC World Markets with a 59% drop and CIBC Retail Markets declining 10%. Retail Markets revenue and earnings momentum remain weak.

What It Means

• Reported earnings were $1.09 per share better than expected. Net charges were $0.48 per share less than expected due to large gain of $895 million on reduction of unfunded commitment on VFN (LEH).

• Book value per share declined 12% in fiscal 2008 to $29.40 per share.

CIBC was downgraded to a “sell” by Dundee Securities analyst John Aiken after the bank reported its quarterly results Thursday morning. While he does not believe CIBC will need to raise more common equity in the near term, the bank “may not be deploying capital in areas that will generate growth once some stability returns to its operating environment.”

Mr. Aiken also told clients that external uncertainty and the impact on CIBC’s on and off balance sheet items suggest the coming quarters are not a good time to hold the stock.

“Despite a weakened valuation and a very strong regulatory capital ratio, we are hard pressed to recommend CIBC’s stock as the fourth quarter demonstrated way too many moving parts to have any confidence in limiting future write-downs,” he said.

Mr. Aiken is looking for more clarity on the bank’s outlook for additional write-downs. While this could come from CIBC’s afternoon conference call, it will probably take better visibility on the structured credit markets, the analyst said. “No one is forecasting this to occur any time soon.”

CIBC’s positive tax adjustments helped offset damage from another quarter of write-downs. Meanwhile, its net loss of almost $400-million from structured credit activities was offset by a change in valuation methodology to internal modelling from relying on external, arguably liquidation, quotes, Mr. Aiken said. This provided a $300-million benefit, while a change in classification of certain securities allowed the bank to avoid recognizing fair value adjustments of more than $600-million.

“All told, the gross charges relating to the run-off business appeared to be more in the neighbourhood of $1.3-billion,” the analyst said, adding that “significant, material economic losses and write-downs are still a potential for CIBC, regardless of accounting treatment.”

His previous rating was "neutral," while his price target stands at $54.